Interaction between the four basic financial statements Essay



Accounting was defined by the AICPA ( 1953 ) as “ the art of recording, sorting and sum uping aˆ¦ minutess and events which are, in portion, fiscal and construing the consequences ” ( para.1 ) . Accounting may be defined as an art, it has been observed to utilize scientific methods. A more comprehensive definition of accounting by Ansari, Bell, Klammer and Lawrence ( 1997, p.2 ) consists of four cardinal constructs: the nature of accounting as a measurement procedure ; its range which encompasses operational and fiscal information ; the intent of accounting which is helping administrations in accomplishing their strategic aims ; and its properties which are to further the comprehension of the measuring phenomena and to supply information to be used in determination devising.

Purpose of accounting


Accounting is viewed as a linguistic communication that is utilized by administrations in determination devising. Therefore, accounting has continued to be due to its utility in to the society at big and to a narrower context, to the users of accounting information. The users of accounting information can be divided into two ; internal and external users. The direction and employees are the internal users of accounting information ; they use it for operational, administrative and strategic intents. External users are ; investors, providers, creditors, clients, the authorities and the general populace.

Fiscal statements ( besides known as fiscal studies ) are formal records used for hive awaying fiscal activities of a individual or a concern entity. For a concern entity, all the needed fiscal information that is presented in a formal mode such that it can easy be understood is referred to as a fiscal statement. There are typically four basic fiscal statements, these include:

The balance sheet, besides known as the statement of fiscal place or province. The balance sheet studies on a house ‘s assets, liabilities and capital at a peculiar point in clip ;

The income statement: besides called the Net income and Loss history ( “ P & A ; L ” ) . The income statement studies on a house ‘s income, outgo, and net incomes or losingss over a peculiar period of clip. The P & A ; L history provides information on a house ‘s on operation activities such as gross revenues and the assorted disbursals incurred by the house during the province of processing ;

Statement of maintained net incomes, this explains the assorted alterations in a house ‘s retained net incomes over a fiscal period ;

And eventually we have the statement of hard currency flows. As the name suggests, this studies on a entity ‘s hard currency flow activities, in peculiar activities affecting operations, investings and those that are fiscal in nature.

Interaction between the four basic fiscal statements


First, there is the Income Statement. The net income and loss and loss history displays how profitable a house is. Having a positive net income merely means that the company is doing money. On the reverse, holding a negative net income is a mark that the house is runing at a loss. The income statement is prepared utilizing accounting entries affecting grosss and disbursals over a fiscal period. The interrelatedness of fiscal statements can be explained utilizing the accounting equation. The accounting equation is stated as Assetss = Liabilities + Capital. In the accounting equation, Capital consists of grosss and disbursals. From the accounting equation, gross additions proprietor ‘s equity while disbursals decrease capital ( the money invested in the company by the proprietors ) . Since the house ‘s balance sheet is based on the accounting equation, and the proprietor ‘s equity being a constituent of the balance sheet, this is its connexion to the income statement. Second, there is the Statement of Retained Earnings.

This is developed after the Income Statement utilizes informations from the Income Statement. Normally, the net net income ( as obtained from the income statement ) is either maintained or paid out in footings of dividends or both actions are taken by houses. Third, we look at the Balance Sheet and the Accounting Equation. As discussed above, the balance sheet shows the net worth of a house. Both sides of the balance sheet have to tally every plus is purchased with either a liability, or Capital, such as a portion a house ‘s retained net incomes. The net income and loss history is an index of profitableness while the balance sheet represents the net worth of a company. Finally, there is the Statement of Cash Flows. This uses informations obtained from both the income statement and balance sheet. This peculiar statement is developed last of all the statements.

Importance of fiscal statements to their users


The aim of fixing fiscal statements is to present information about a company demoing their public presentation, fiscal place, and the alterations in their fiscal place that are utile to several of such statements in doing economic determinations. In order to be relevant, fiscal statements should be dependable, apprehensible, and comparable. Fiscal statements will describe on assets, liabilities, capital, net income and losingss that are straight related to a house ‘s fiscal place, they are intended to be apprehensible by users who comprehend accounting rules as used in concerns. Fiscal statements are used by users for different intents. These include ; Investors and directors use fiscal statements to do critical concern determinations that straight impact on their continued operations.

These statements are analyzed is to give the direction a more elaborate apprehension of the Numberss. Fiscal statements organize portion of the direction ‘s one-year study to the stockholders. Employees need fiscal studies for doing understandings with the direction ; this is largely for labour brotherhoods in discoursing compensation affairs. Prospective investors utilize fiscal statements in measuring concern viability. This is normally done by fiscal analysts to assist investors in determination devising. Financial establishments use fiscal statements in determination devising on recognition issue to companies. Government entities use fiscal statements in determining the truth of revenue enhancements and other responsibilities that are paid by a company. Suppliers who normally extend recognition to a company usage fiscal statements in measuring the creditworthiness of the concern entity. Finally, the media and the general public involvements in fiscal statements such as whether the company is lending to societal public assistance.



It is clear that fiscal statements organize portion of the houses activities and houses are required by the jurisprudence to fix and present fiscal statements are frequently as possible. The four basic fiscal statements used by houses are ; the income statement, the balance sheet, the statement of maintained net incomes and the hard currency flow statement. All these statements are interrelated and are prepared in the above order. Fiscal statements are of involvements to assorted stakeholders such as investors, the authorities, and fiscal establishments among others.


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